FSA Crackdown

In news this week the Financial Services Authority (FSA) announced planes to ban self-certification mortgages and mandatory affordability tests for all mortgages. It is a good sign that the UK financial regulator is doing something to manage risky credit in the mortgage market. But the question is: Is it the lender's responsibility or consumer responsibility? I think its a balance of both.

Key measures proposed by the FSA include:

• Affordability tests for all mortgages
• Bans on 'self-certification' mortgages- do not require verification of borrowers' income
• Ban on sale of mortgages that contain “toxic combinations”- such as offering a high loan-to-value loan to a borrower with a poor credit history

The FSA should enforce the measures now instead of waiting. It would be in the best interests for banks to act responsibly and for borrowers to act rationally when it comes to affordability.

Statistics provided from the FSA, 45 percent of mortgages issued in 2007 made no checks on the applicants' income. It is very scary considering the amount of money that an applicant would be able to borrow (in some cases more than a 100 percent of the value of a home!) and overstate income. Can the consumer be blamed for overstating their income if it comes down to the home dream they want? There is nothing stopping them.

The Council of Mortgage Lenders (CML) says that mortgages will be more expensive and harder to obtain but the measures are likely to prevent the credit shortage we have now. There has to be a balance to allow credit to flow into the economy but at the same time prevent irresponsible lending practices that fuelled the credit crisis. It will also help to dampen rising housing prices and allow for first time buyers to enter the market.

Banks should be able to lend based on an individual's needs but in a way that they can expect the money to be eventually returned. This includes a reducing high-risk lending practices and tightening credit standards.

The four papers I read this week highlighted the differences in opinion on the responsibilities of consumers and lenders.

The Financial Times headline read “Mortgage borrowers face stricter tests”. The article was objective, factual and straight-forward to read. It reported opinions from the British Bankers Association (BBA), Building Societies Association (BSA) and the CML who would be directly affected by the changes. The BBA and the BSA supported the measures but with some caution and implied that they have acted in a similar manner already.

Bloomberg this week was a longer critical piece than the FT. It had additional quotes from the FSA CEO Hector Sants and mentioned the FSA plans for an extension of their powers. However, I thought that the Binham article was critical to the speed of the review since it was promised since March and the lack of momentum of mortgage approvals.

The Telegraph and The Daily Mail were very different stories but fun and easy to read. Once you read these articles you immediately know that the articles were written to support the home buyer. The Telegraph was more inclined to report the critics of the measures such as the CML and failed to report on the consumer's responsibilities in repaying their debts.

The Daily Mail was the most subjective of the articles which had a headline “Homebuyers forced to reveal how much they spend on alcohol in tough new mortgage tests”. This was an attention grabbing headline and surely got my attention! The Daily Mail wrote more about the affordability test. Not surprising, the Mail used different quotes from the BBA and BSA, focusing on the difficulty for would-be buyers.

As new measures are brought into the mortgage market it is important to consider the implications for lenders and borrowers. The articles I have read provide various opinions on the issue but are ultimately a good way to promote and encourage awareness for banks and consumers. To some extent there must be regulations in place to prevent the consumer from overstating incomes. Consumers must think rationally and know their 'true' limits on repaying loans. But to also be protected from overzealous banks who are willing to lend at a level that would be unaffordable. Banks must also act in a responsible and reasonable manner. Do their due diligence and maybe have some pessimism when it comes to loans being repaid.